ABSTRACT
Imports of intermediate goods (MQ) are related to the output of domestically produced goods and to stockbuilding in the following way. YM + MQ measures the volume of domestically produced output, including the output of goods added to stocks, since YM measures the domestic factor element in such output and MQ measures the imported intermediate goods embodied in such output. SH measures the volume of total stockbuilding of which a proportion a is assumed to be imported directly so that a proportion (1 - a) is therefore the amount that is already included in the output YM + MQ. It is assumed that a proportion a of total home output represents imported intermediate goods. It follows that such imports consist of (1) the amount embodied in domestic output, namely a(YM + MQ) plus (2) the amount imported directly for stockbuilding, namely aSH, so that MQ = a(YM + MQ + SH). The proportion a is here assumed to have the same value .24632 as that in the equation for wholesale prices PWHO (equation 12), so that a/(1-a) (= .3268) measures the marginal propensity to import intermediate products. This produces an average propensity to import intermediate goods much larger than that which actually obtains and the difference is met by adjustment of residuals. Relative prices are absent from the equation for MQ, partly because only a small amount of price sensitivity of imports of intermediate products is present in the Treasury Model, and partly for theoretical reasons. To introduce them would mean that the ratio of intermediate imports to total final output of home-produced goods could change as substitution took place between intermediate imports and home-produced intermediate goods. But if this happened the ratio of gross output (Le. of final output plus output of intermediate products) to final output would change and so would the ratio of factor demands for labour and capital to
final output change (since factor demands must depend on gross rather than final output). Such a possibility suggests that for consistency there should be an identification of gross as well as final output suggesting a need to complicate the model unduly. To avoid the complexity whilst preserving consistency, a constancy of the ratio of imports of intermediate goods to final output was imposed. See Vines (1979) for a model in which this complexity is added.
